Stakeholder Theory Essay Example | Topics and Well Written Essays - 500 words

Stakeholder Theory - Essay Example Stakeholders include shareholders, employees, suppliers, customers, and the communities in which the firm operates-a collection that Freeman terms the "big five." The very purpose of the firm, according to this view, is to serve and coordinate the interests of its various stakeholders. It is the moral obligation of the firm's managers to strike an appropriate balance among the five interests in directing the activities of the firm. This understanding of the firm's purpose and its management's obligations diverges sharply from the understanding advanced in the shareholder theory of the firm. According to shareholder theorists such as Nobel laureate economist Milton Friedman, managers ought to serve the interests of the firm's owners, the shareholders. Social obligations of the firm are limited to making good on contracts, obeying the law, and adhering to ordinary moral expectations. In short, obligations to nonshareholders stand as side constraints on the pursuit of shareholder interests. This is the view that informs American corporate law and that Friedman defends in his 1970 New York Times Magazine essay, "The Social Responsibility of Business Is to Increase Its Profits." (Thomas. J. Donaldson, 1994) Stakeholder theory seeks to overthrow the shareholder orientation of the firm.